Airbus seeks new European help over A400M costs

Tim Hepher, Cyril Altmeyer

4 Min Read

PARIS (Reuters) - Airbus (AIR.PA) called on Wednesday for new talks with European governments to ease “heavy penalties” for delays to its A400M military aircraft, after taking a fresh 1.2 billion euro ($1.3 billion) charge for Europe’s largest defense project.

A waiter walks past an Airbus A400M military transport plane is parked at the Airbus assembly plant during an event in the Andalusian capital of Seville, southern Spain, December 1, 2016. REUTERS/Marcelo del Pozo

The appeal comes seven years after Airbus won what at the time was regarded as a definitive 3.5 billion euro bailout for the delayed project, plagued from the start by political wrangling over the choice of new European engines.

Airbus said recent problems with engine gearboxes and delays in supplying defensive aids had led to severe penalties, bureaucratic arguments and cash being held back by governments.

“We cannot go on like that. This is unacceptable and puts a huge burden on Airbus and we need to do something about it,” Chief Executive Tom Enders said.

An unusual fixed-price contract worth 20 billion euros reflected efforts by Airbus at the time to win a major military contract to add to its growing jetliner business.

But it foundered over problems with the West’s largest turboprop engines, which were to be supplied by a European consortium instead of Airbus’s preference for a Canadian supplier, as well as tight deadlines for military hardware.

Speaking after reporting lower 2016 profits, Enders argued Airbus was still paying for the “original sin” of striking an unrealistic deal 14 years ago, despite having reset the program with the 2010 bailout deal.

The pan-European agency representing the buyers was not available for comment.

But Germany, the largest A400M buyer which has been most critical of the project, expressed little immediate appetite to help Airbus cope with the latest issues.

“It is important that the manufacturer resolves the current problems in the program,” a defense ministry spokesman said.

Tobias Lindner, a Green lawmaker and member of the German parliament’s budget committee, urged the government to press for “a new and resilient” agreement without reducing penalties.

CALL FOR REASSURANCE

Enders, who is said to privately regret not cancelling the project before the bailout in 2010, declined to say if Airbus would threaten to stop building the plane.

Airbus shares fell about 1 percent on news of the 1.2 billion euro charge, which brings the total amount it has written off on the A400M towards 7 billion euros.

Raymond James analyst Harry Breach wrote that Airbus needed to reassure investors the stream of charges was nearing an end.

Several others questioned how easily Airbus would be able to strike a new A400M deal in the midst of budget austerity, French and German elections and political distractions in a group of nations dealing with Brexit and conflict in Syria.

“I am not sure that the states will agree to put their hands in their pockets once again,” said Chloe Lemarie, director of aerospace and defense research at Mainfirst Bank in Paris.

The A400M overshadowed a narrower-than-expected drop in 2016 core earnings as Airbus delivered a record 688 jetliners.

Core operating income fell 4 percent to 3.955 billion euros on revenues up 3 percent. Analysts had expected a 7 percent drop in core profit due to weaker pricing of old models.

Airbus said bottlenecks in the supply chain for its A350 jet had improved, but called for a “huge effort” from engine maker Pratt & Whitney (UTX.N) to ease delays in A320neo output.

It predicted more than 700 jetliner deliveries in 2017.

It did not give a formal target for orders but executives say they will lag deliveries for the first time since 2009 as the aircraft market slows.